19 December 2011 12:13 PM

Keeping house prices down by making sure people can afford mortgages is a wise idea

‘Sorry, you can’t have a mortgage.’ Those are not the words anyone cultivating a homebuying dream wants to hear, whether they are a first-time buyer or a family moving up the ladder.

And for a heady few years, they were not the words a bank or building society liked to say either – instead preferring lines such as: ‘would you like to borrow some more to cover arrangement fees, pay stamp duty, buy some carpets etc?’

Now, just four years after that great credit boom started to spectacularly unravel, and took world economy with it, we have the British arrival of prospective tougher new homeloan rules in the form of the Mortgage Market Review, and people will be hearing the dreaded ‘no’ a little bit more often.

This review may be painted by its critics as being heavy-handed, but really goes no further than simply requiring lenders to actually check people can pay back the money they are borrowing.

Fortunately, we’ve had a few years to already get used to this, as banks and building societies long ago wised up to their own reckless lending and hit the big red button market stop chucking money at anyone you can see.

Those who have felt the chill of refusal for a mortgage over that period have had the credit crunch, recession, property slump and now eurozone crisis to handily blame, but in the future they may just have to face up to the fact that they can’t afford to borrow so much.And while that is going to unpalatable for some, in the long run it will do us good because it will keep a lid on house prices.

The easy mortgage boom allowed house prices to detach themselves from earnings. Property prices rocketed yet salaries barely lifted. That delivers an illusion of wealth and while things are going up, the voices saying that overpriced housing is not a good thing tend to get drowned out by the racket the party is making.

But the hangover from a property boom is painful: you have a nation lumbered with the price of one of life’s absolute essentials – sticking a roof over your head – being too high. People can’t move, first-time buyers can’t afford a home in the area they grew up in, mortgages eat huge chunks of your pay, rents are high, and our collective personal finances put us in a weak position due to our high levels of household debt.

And while an expensive home might make you feel rich, you aren’t really, because the only way to cash in is to sell up and buy an inferior one, move to a worse area, up sticks to a different part of the country, or die and give it to your kids minus the taxman's take. [Get over the cheap thrill of knowing you have a half-a-million-pound house and generally speaking lower house prices seem better than each of those options.]

So building up some defences while we are in a slump to stop house prices shooting up again due to overly loose credit when the good times eventually return, is one of the wisest moves we’ve seen our financial authorities take in the dramatic recent economic times we’ve seen.

Lenders have already done this, but they cannot be trusted to maintain this stance when the pound signs start flashing before their eyes again.

The biggest barrier to getting a mortgage since the credit crunch hit has been raising a deposit. This is a crude measure, but as a swift fix it tends to work in terms of sifting borrowers into piles marked less risky and riskier and it also provides a nice big safety net against negative equity.

But demanding big deposits is the wrong way to control mortgages [note that first-time buyers bought with on average smaller deposits throughout the 1980s and 1990s than in the 2000s rush.] The boom may have seen the madness of 100%-plus mortgages but this was only a tiny part of the market and the bigger problem was ‘pile-em high, sell-em cheap’ supermarket-style mortgage pricing – with some home loans sold almost as loss-leaders.

An industry that behaved like this needs tougher rules and a plan to check through people’s finances, see what they spend out of their earnings and whether they can afford their mortgage if interest rates rise, is just common sense.

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Comments

I do not see regulation as an answer to anything. There has to be consequence to reckless lending and that is the bank responsible should go bust! Its as simple as that! The ability to package and sell on risk is just crazy! The buyer of risk can NEVER be able to quantify it lower than the organisation that created it. So why on earth should the organisation that created it want or be able to sell it on? They would never get the cost value back unless the market for such risk is in a bubble situation. But why should such a bubble ever get started? It biggles the mind that such fundamentals seem to be lost in economics. And these analysts get payed BONUSES for peddling such lousy thinking. Banks and their CEOs should be hung out to dry imo.

The way I see it is that we cannot take into account is (unfortunately) the future! We in a great job, or running a successful business today and so able to get our affordable mortgage - only to find that market forces have knocked our job or business for six. Our mortgage suppliers aren't interested in any way, and as we are unable to be baled out by the government, they jump straight in and reclaim the property(s) regardless of our future prospects. (Been there - Done that - Lost it all)

'So building up some defences while we are in a slump to stop house prices shooting up again due to overly loose credit when the good times eventually return, is one of the wisest moves we’ve seen our financial authorities take in the dramatic recent economic times we’ve seen.'

Collateral and loose lending is the main problem. Low levels of collateral cause asset prices to inflate so yes your article is on the money!

A wise idea.A new idea.hardly,I can remember my sister and her husband way back in 1951 having to save with a bank for at least two years to prove they could make and maintain regular payments.Only then could they have a mortgage. A wise idea,no ,just perhaps common sense.